20181114Morris Supplemental Rebuttal.pdf

ON BEIIALF OF AVISTA CORPORATION
DAVID J. MEYER
VICE PRESIDENT A}TD CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
P.O. BOX 3727
I4LL EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220_3727
TELEPHONE : [phone]L6
FACSIMILE: (s09) 495-8851
DAVID . MEYER@AVISTACORP . COM
ON BEHAI,F OF HYDRO ONE I,IMITED
EI,IZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&I, GATES LLP
925 FOURTH AVENUE, SUITE 29OO
SEATTLE, WA 98101_4-l_1_58
TELEPHONE: [phone]
FACSIMILE: [phone]
LIZ . THOMAS@KLGATES . COM
I(ARI . VA}.TDERSTOEP@KLGATES . COM
IN THE MATTER OF THE JO]NT
APPLICATION OF HYDRO ONE LIMITED
(ACTING THROUGH ITS IND]RECT
SUBSIDIARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORATION
FOR AN ORDER AUTHORIZING PROPOSED
TRANSACTION
FOR AV]STA CORPORAT]ON
(EI,ECTRIC AND NATURAI, GAS)
ldaho Public Utilities
Office of theRECEIVED
UCT I It
Boise, ldaho
CASE NO. AVU-E-1.7_09
CASE NO. AW-G-17-05
SUPPLEMENTAL
REBUTTAL TESTIMONY
OF
SCOTT L. MORRIS
BEFORE THE IDAIIO PI'BLIC UTILITIES COMMISSION
ion
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I. INTRODUCTION
O. Will you please atate your narne, business address,
and poeition with Avista Corporation?
A. My name is Scott L. Morris and I am employed as
the Chief Executive Officer of Avista Corporation
("Avista" ) , at 741,1, East Miss j-on Avenue, Spokane,
Washington. I also serve as the Chairman of the Board of
Avista.
O. Are you the same Scott L. Morris who sponsored
pre-filed direct testimonyt dB well as eupplemental
testimony on behalf of Avista Corporation (AviEta) ?
A. Yes, I sponsored Direct Testimony and Exhibit 1-,
Schedules I through 3 and Supplemental Testimony and Exhibit
11, Schedule 1.
A. Are you sponsoring any exhibits in this
supplemental testimony?
A. Yes, I am sponsoring Exhibit No. 16, Schedule 1
which is a Press Release entitl-ed "Hydro One and Avista
Announce Selection of Independent Directors for Post-Merger
Avista Board". A table of contents for my testimony is as
2L follows:
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Avista Corporation
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TNTRODUCTTON ...................... I
RESPONSE TO COMMISSION STAFF SUPPLEMENTAI, TESTIMONY,,,.2
NOTICE REGARDING ONTARIO ELECTION AND IMPACTS OF
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EI,ECTION ON HYDRO ONE GOVERNANCE ....... 8
IV. INTRODUCTION OF NEW AVISTA BOARD OF DIRECTORS................ IO
II. RESPONSE TO COMMISSION STAFF SUPPLEMET TAI, TESTIMOI{Y
A. Overa1l, do you believe the conditions set forth
in Idaho Code S6L-328 have been met?
A. Yes, as provided in the Joint Application, Idaho
"Commission" ) must find that: 1 ) the transaction is
consistent with the public interest; 2) the transaction will
not cause the cost of or rates for supplying electrical
service to increase; and 3) that Hydro One has t.he bona fide
intent and financiat ability to operate and maintain
Avista's operations in Idaho. I believe Avista and Hydro
One, as the Joint Applicants have met the required
conditions.
A. Does Commission Staff also believe the conditions
in Idaho Code 551-328 have been met?
A. Yes. Commission Staff witness Ms. Carlock states
the following in her supplemental testimony:1
Yes, I believe Idaho Code 55l--328 (3) requirements will
be met. The transaction is consistent with the public
11 Code S61-328, the ldaho Public Utilit.ies Commission (the
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1 Carlock, Di., p. 4, lines ll-22 (emphasis added).
Morris,
Avista
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Corporation
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interest becauseIdaho customers,
the Stipulated Commitments prot.ectprovide financial rate credits,provide funding for other customer benefits and enhance
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programs. The Stipulated Commitments also assure that
the cost of and rates for supplying service will not be
increased by reason of such transaction. Rating agencyreports and publicly available financial statements
document that Hydro One has the bona fide financial
ability to operate and maintain said property in thepublic service.
A. Ms. Carlock stateg that there are a nurnber of
13 benefits that would accrue to Idaho customerg should the
1-4 Conunission approve the transaction. Can you provide just a
15 few of thoge commitment,s that are beneficial for Idaho
L5 cuEtomerE?
L7 A. Yes. First, Iet me start by saying that Avista
1-8 very much appreciates the hard work put forth by the parties
19 in this case who helped develop the strong set of St.ipulated
20 Commitments and their continuing support of the transaction.
2l In particular Commission St.aff has been instrumental in
22 strengt.hening some of the commitments on behalf of
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Transaction"), the
closing of the merger (the "Proposed
customers, employees and communities
26 Avist.a serves in Idaho will see little or no change in
existing
and wiIl
Idaho. It
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Avista Corporation
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Avista's operations. Avista wilI
corporate headquarters in Spokane,Washington,
utility in29 continue to operate as a standalone
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wilI maintaj-n its other office locations throughout its
Idaho service territory, continue to operate under the same
Avista name, and seek to retain its existing employees and
management team. Avista's cul-ture and its way of doing
business will contj-nue for t.he long-term.
Avista believes this preservation of Avista's name, its
headguarters, its culture and its way of doing business,
among other things, is important to Avista's Idaho
customers, in that customers can continue to expect and
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satisfaction. In addition,
financial benefits in the
customers will see immediate
form
and a high level of customer
of proposed retail rate
beginning at the cl-ose of
total Ievel of financial
Rate Credits total j-ng approximat.ely $l-5. 8 million to
its Idaho customers in the first five (5) years after
the merger closes. (Stipulated Commitment 19. )
Morris, Supp. Reb. 4
Avista Corporation
13 credits and other contributions
L4 the Proposed Transaction. The
15 commitments funded by Hydro One and Avista (excluding
15 charitable contribut.ions) in Idaho greatly exceed what was
L7 originally proposed in the Joint Application. Sti-pulated
l-8 Commitments 58-55 provide funding and other forms of support
79 for a number of initiatives that, absenL t.he transaction,
20 would not accrue to the benefit of Idaho customers. These
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a Approximately $5.3 million in funding over a 1-O-yearperiod for energy efficiency, weatherization,
conservation, and low-income assistance programs under
the directj-on of a newly-formed stakeholder committee.(Stipulated Commitment 58. )
Support for Clearwater Paper and Idaho ForesL Group on
certain demand-side management programs. (Stipulated
Commitments 59 & 60. )
A $7 million one-time contribution to Avista's
charitabl-e f oundation, and a $2 million annua]
cont.ribution for five years after close. (Stipulated
Commitment.s 11 & 61.)
Avista's continued work with Iow-income agencies to
address the needs of Iow-income customers, and efforts
to improve t.he penetration rate of low-income programs.
(Stipulated Commitments 52 & 54. )
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20 In the end, Idaho customers will see real, substantive
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22 benefits that will not otherwise accrue to Idaho customers.
23 LasLIy, this transaction is supported by
24 representatives of each segment of our customer base: Iow-
25 income, residential, commercial and industrial. OnIy the
25 Iat.e interventj-on of the self -styled "Avista Customer Group"
27 is in opposition.
28 A. Do you agree wittr Ms. Carlock's coaclusioas
29 related to the Governance CommitmentE contained within the
30 Stipulated Commitments?
3l- A. Yes. Ms. Carlock is correct in that the
32 governance-related Stipulated Commitments 2 and 3 assure
33 Hydro One, as the sole shareholder of Avista (or the Province
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Avista Corporation
1 of Ontario as a large minority shareholder of Hydro One),
2 does not have t.he control to change the operations and
3 regulatory environment of Avista. For example, Stipulat.ed
4 Commitment 2 was modified so that the Avista Board of
5 Directors is responsible for decisions around employee
5 compensation, not Hydro One. Stipulated Commitment 3 has
7 been strengthened to add citizenship and residency
8 requirements for Independent. Directors on the Avista Board
9 of Directors, and Clause 2 of the Delegation of Authority
10 was also strengthened to protect Avista if Hydro One is
l-l- temporarily unable to appoint an Independent Director to the
L2 Avista Board.
l-3 A. Do you believe there are adequate financial and
L4 bankruptcy riag-fencing Stipulated Conunitments to protect
L5 all Parties and customers?
L6 A. Yes. The Stipulat.ed Commitments appended Lo the
17 First Amendment to Stipulation and Settlement contain a
18 substantial number of financial and bankruptcy/ring-fencing
L9 protections that wiII prot.ect the financial health of
20 Avista. There are Stipulated Commitments that (i) Avista
2L will continue to have its own credit ratings, (ii) assure
22 that Hydro One will provide equity capital injections to
23 support Avista's capital structure and allow Avista to
24 access debt financing under reasonable Lerms and on a
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Avista Corporation
1 sustainable basis, and (iii) provide restrictions on
2 dividends and distributions that help preserve Avista's
3 financial integrity. Hydro One and Avista also committed to
4 issue a single share of preferred stock referred to as the
5 Golden Share to an independent third party to address any
5 bankruptcy concerns.
7 Q. Have the parties made reagonable efforts to
8 anticipate future risks?
9 A. Yes, and we are appreciative of their efforts.
10 A1I identified or reasonably Iikely risks have been
11 quantified and addressed in the First Amendment to
L2 Stipulation and Settlement. In addition to the specific
13 commitments that ensure the independence of Avista's board
L4 and its financial integrity are protected from Provincial
15 influence, a new Stipulat.ed Commitment, Commitment 74, was
15 added to provide that. if an event occurs that would have an
effect on Avista's operations and/or
of Avista's corporate relationship
affects Hydro One's compliance with
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customer rates because
with Hydro One, or
any commitment, any of
may petition the Commission
the final order in the Case.
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al-ter or amendat any
That, I
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believe, should help to mitigate any fear of the
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III. NOTICE REGARDING ONTARIO EI,ECTION AIVD IMPACTS OF
EI,ECTION ON HYDRO ONE GOVERNAI{CE
O. Commisgion Staff states \rit uay be viered by sone
that the Applicants did aot adequately report in a timely
manaer and were not enEirely forthcoming regarding the
independence of Hydro One from the Province, Hydro One as a
campaign iesue in Ontario, and the impact of the election on
Eydro One."2 Commiesion Staff states that Hydro One and
Avieta should have notified them that Hydro One had become
10 the eubject of campaign promisee leading up to the .fune 7,
l-1 20Lg eLection. Cormnission Staff also states that Hydro One
1-2 and Avista should have notified the Commission of the iluly
13 LL, 2OLg removal of the llydro One Board and reLirement of
L4 the Hydro One CEO before sending the iluly L8, 2OLB Letter to
15 the Commission. Do you agree with theee criticisms?3
16 A. I do. Avista prides itsel-f on engaging with its
L7 regulators and the parties to its proceedings in an open and
l-8 transparent way. Leading up to the election, AvisLa and
L9 Hydro One did not know whj-ch of the three major parties in
20 Ontario woul-d win the premiership and whether any of the
2L parties would win a majority of the seats in the Ontario
22 parliament. It was impossible to determine whether any of
23 these parties had an interest in or the ability to follow
2Carlock Direct Testimony at pg.3Carlock Direct Testimony at pgs
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Avista Corporation
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through on their campaign promises prior to the election on
June 7, 20L8. In hindsight, however, I do agree with
Commission Staff that Avista and Hydro One could have alerted
them to the issues being raised in the hotly contested
Ontario election prior Lo ,June 7, 2018 .
Once the election occurred on June 7, 201-8, however,
Avista and Hydro One used their next opportunity to alert
the Commission and parties to this proceeding to the risks
to Hydro
Avista's
One that emerged from the Ontario election. In
and Hydro One's Joint Comments in Support of
1l- Stipulation and Settlement,4 filed just 13 days after the
L2 June 7, 2018 election and before the new government was sworn
13 in on ,Iune 29, 201,8, AvJ-sta and Hydro One explained aII of
L4 the possibte ways in which the new government could impact
l-5 the governance and management of Hydro One, or potentially
16 Avista, Lf the new government decided to follow through on
17 its campaign promises.
l-8 I also agree with Commission Staff that Avista and
L9 Hydro One should have reached out to Commission Staff and
20 the part.ies to this proceeding in a more timely manner after
2L Hydro one announced on ,Ju1y 11, 201,8, that it reached an
22 agreement with the new government in Ontario to effectuate
a See AW-E-1,7-09/AvU-G-l-7-05, Avista and Hydro One rloint Comments in
Support of Stipulation and Settlement (June 20, 2018) ("Joint
Comments").
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the resignation of the Hydro One Board and retirement of the
Hydro One CEO. Although it was not possible to disclose
these changes in advance of the July LL, 20Lg announcement
because of the potential impacts on Hydro One's and Avista's
stock price, Avista and Hydro One should have contacted
Commission Staff and the parties to this proceeding prior to
the letter we sent on ,Ju1y 1-8, 2018.
IV. ITiITRODUCTION OF NEW AVISTA BOARD OF DIRECTORS
A. Have Avista and Hydro One announced who will serve
ag the Independent members of the Avista Board of Directors,
should the traneaction be approved?
A. Yes. Avista and Hydro One announced on Wednesday,
November 7, 201,8, the five independent directors selected to
1,4 serve on the new Avista Board of Directors, if the proposed
Washington,
included as
15 merger is approved by utility commissions in
Tdaho and Oregon
Exhibit No. a6,
The press release has been
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Schedul-e 1. A11 f ive selections are
independent of both organizations, ds defined by New York
Stock Exchange rules, and have ties to the U.S. Pacific
Northwest.. Moreover, all of the Hydro One appointees are
U.S. citizens who are and have been residents in the Pacific
22 Northwest for at least two years. The
23 directors would include myself, continuing
four remaining
in my role as
24 chairman, currenL Avista president and director Dennis
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Avista Corporation
l- Vermillion, the CEO of Hydro One and one other senior
2 executive from Hydro One, to be named.
3 The independent directors were selected at this time so
4 that the Avista board of directors would be prepared and
5 ready to begin serving their terms assuming the Proposed
5 Transaction is approved and closes, which is requested by
7 the end of this year. The newly selected directors are:
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a Kristianne Blake (evista Eelectioa and Curent Avista
Board Member): Ms. Blake serves on the current Avista
Board of Directors as lead director and has been an
Avista Director since 2000. She is a long-t.ime resident
of Spokane, Washington and has a rich history of
involvement in the Spokane community. She has been the
president of the accounting firm of Kristianne Gates
Blake, P.S. since L987 and has an extensive background
in public accounting. She was a Certified Public
AccounLant for 33 years, and she worked for l-3 years
for an international accounting firm. She has served
for 22 years on various boards of public companies and
registered investmenL companies. Ms. Bl-ake is also
currently serving as board chair for the Russell
Investment Company and the Russell investment Funds.
Donald Burke (Avista selection and Curent Avigta Board
Member): Mr. Burke serves on the current Avista Board
of Directors as the chair of the audit committee and
has been an Avista Director since 20]-]-. As a director,
he serves as the Board's designated financial expert.
He also currently serves as an independent director for
the Virtus mutual fund complex and Duff & Phelps closed-
end funds complex. From 2005 to 2010, Mr. Burke served
as a trustee for numerous global funds that were advised
by BlackRock, Inc. From 2006 Lo 2009, he was a managing
director of BlackRock and served as the president and
CEO of the BlackRock U.S. mutual funds. In this roIe,
Mr. Burke was responsible for all of the accounting,
tax and regulatory reporting requirements for over 300
open and cl-osed-end mutual funds. Mr. Burke j oined
BlackRock in connection with the merger with Merril-I
Lynch Investment Managers ("MLIM"), taking a Iead role
Morris, Supp. Reb. 11
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in the integration of the two firms' operatinginfrastructures. While at MLIM, Mr. Burke was the Headof Globa1 Operations and Client Services and also
served as the Treasurer and Chief Financial Officer
("CFO") of the MLIM mutual funds. He brings significantfinancial experience to the board from his years inpublic accounting and his role as the treasurer and CFOof numerous mutual- funds. He has extensive board
e>rperience, having served on the audit., compliance,
governance & nominating, and cont.ract review committeesof various boards. Through his service as an Avistadirector, Mr. Burke has demonstrated his commitment tothe Pacific Northwest region.
Christine Gregoire (Hydro One gelection): Ms. Gregoireis the CEO for Challenge Seattle, dr organization
comprised of 18 major international companies and non-profits located in the Seattle region. Previously, she
served for two terms as Governor of the State of
Washington with a $32B biennial budget and over 60,000
employees. In her first term as Governor, she createdthe Department of Early Learning and led on reforms tothe K-12 system and investment in higher education. SheIed the state in a historical investment ininfrastructure, addressed the water wars in the state,
Ied an historic number of trade missions, reformed thefoster care system to prot.ect children and was amongthe first to lead in health care reform. During her
second term, Ms. Gregoire led the state in major
reforms, management and budgeting to position the state
as one of the most financially secure to come out ofthe rrGreat Recession." Prior to becoming Governor, she
served for three terms as Attorney General for the State
and prior to becoming Attorney General, she served fouryears as the Director of the State Department of
Ecology. She is also a member of the Fred Hutch Cancer
Research Center and the Bj-partisan Governor's Council,
and on the advisory boards of the William D. Ruckel-shaus
Center and the Progressive Coalit.ion f or American ,fobs.
Ms. Gregoire recent.ly completed her third year as Chair
on the National Export-Import Bank Advisory Board. Sheis a graduate of Gonzaga University School of Law, and
she and her husband also have a home in north Idaho.
Scott Maw (Hydro One selection and Current Avista Board
Member): Mr. Maw serves on the current Avista Board of
Directors and has been an Avista Director since 20L6.
Morris, Supp. Reb. l-2Avista Corporation
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He has been executive vice president and CFO for
Starbucks Coffee Company since February 20L4. He is
responsible for Starbucks' Global Ej-nance organization.
Prior to that, he served as senior vice president of
Corporate Finance for Starbucks where he was
responsible for corporate finance, including
accounting, tax and treasury. Mr. Maw also had
oversight for aII financial and securities-related
regulatory filings. He joined Starbucks as global
controller in 2011,. Prior to joining Starbucks, Mr. Maw
served as CFO of SeaBright Insurance Company from 20L0
to 2011. From 2008 to February 2010 he served as CFO of
the Consumer Banking division of LTPMorgan Chase & Co.
He is a Seattle, Washington resident, with roots in
Eastern Washingt.on. He graduated from Deer Park High
School, just north of Spokane, and is a graduate of
Gonzaga University.
Marc Racicot (Hydro One selection and Current Avista
Board Menber): Mr. Racicot. serves on the current Avista
Board of Directors and has been an Avista Director since
2009. He served as president and CEO of the American
Insurance Association from August, 2005 to February,
2009. Prior to that, he was a partner at the law firm
of Bracewell c eiuliani, LLP from 200L to 2005. He is
a former governor (1993 to 200L) and attorney general
(1989 to L993) of the state of Montana. Mr. Racicot was
nominated by President Bush and unanimously elected to
serve as the chair of the Republican National Committee
from 2002 to 2003 prior to assuming the position of
chair of the Bush/Cheney Re-election Committee from
2003 to 2004. He previously served as a director for
Siebel Systems, Al1ied Capital Corporation, Burlington
Northern Santa Fe Corporation Plum Creek Timber
Company, and The Washington Companies, and presently
serves as a director f or laleyerhaeuser Company and
Massachusetts Mutual Life Insurance Company. In
addition, throughout his career, Mr. Racicot has
strongly committed himself to children, education and
community issues. He was appointed to the board of The
Corporation for National and Community Service by
President Clinton and has also served on the boards of
Carroll College, ,Jobs f or America' s Graduates and
United Way in Helena, Montana. He is a life-Iong
resident of Mont.ana and a graduate of Carroll Co11ege.
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O. How mary existing Avista Board memberE would aenre
on the new Avista Board?
A. Including Dennis Vermillion (President of Avista)
and mys elf, a total of six existing Avista board members
would transition to the new Avista Board. The new Avista
board would be extremely strong, given that the majority
would be intimately familiar with Avista and its operations.
Indeed seven of the nine directors are either residents of
the Pacific Northwest or existing Avista Board members.
O. Do you continue Eo believe that this merger is in
the best intereet of Customers?
A. Yes, I do. The development of the robust
Stipulated Commitments, which include a multitude of
interest in Idaho. The
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L4 customer benefits and protections, and now with the recent
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L6 I bel-ieve that this merger is in the best interest of our
L7 Idaho customers and is in the public
t.he f ormstructural safeguards,
commitments negotiated
of multiple enhanced
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supported by
Idaho Forest Group, Idaho
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Conservation League, the Community
Association of Idaho, the Washington
District Council of Laborers, and the
the Commission
Action Partnership
and Northern Idaho
Idaho
and
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Department of
test of time.
Morris, Supp. Reb. l-4
Avista Corporation
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The underlying ratj-onale for this merger remains the same:
the need to preserve and enhance Avista's ability to provide
cost-effective and reliable service to its customers, in a
rapidly evolving industry, by partnering with an
organization that shares Avista's values - all- with Avista's
autonomy intact.
O. At the end of the day, have Avista, Hydro One,
Staff, and other partiea developed commitments that satisfy
the requirements of Idaho Code 551-328?
A. Yes. This Commission has been quite clear-sighted
in describing its responsibilities under the statute:
The statutory criteria governi ng our review of the
merger do not. allow for caprice or
subjectivity. WhiIe public sentiment has been used
to impose significant merger conditions, it cannot
be used as a surrogate for the clear letter of theIaw. In this case, that law (Idaho Code S 5l--328)provides that. the merger "shaIf" be authorized
un1ess the .loint Applicants have failed to sat.isfy
the three criteria discussed throughout this
order. The Joint Applicants carried the burden of
proof in demonstrating that the merger would not
adversely af f ect t.he public interest, would not
result in an increase in rates to existi-ng
PacifiCorp ratepayers and that they have the bona
fide int.ent and financial ability to continue
operating the system in the public interest. s
(Emphasis added)
The Commission has reiterated what the "clear l-etter of
s In the Matter of the ,Joint application and Petj-tion of Pacificorp andScottish Power PLC for a Declaratory Order Approving the Issuance of
PacifiCorp Common Stock, Case No. PAC-E-99-L, Order No. 28213, at p.57
(November 15, ]-997) .
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the law" requires and that a merger \ha1l" be approved if
the three criteria of Idaho Code S5l--328 have been satisfied.
It is not a matter to be governed by "caprice or
subjectivity." As explained by Avista, Hydro One, and Staff,
all three requirements of Idaho Code S5l--328 have been
satisfied. While the Commission or other parties may prefer
a different "marriage partner", the business judgement of
Avista's executive team should be recognized and the merger
must be approved if ldaho Code 551-328 is satisfied.
O. DoeE this conclude your Supplemental Rebuttal
Testimony?
A. Yes it does.
Morris, Supp. Reb. 16
Avist.a Corporation
10
L2
11